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Fitch Affirms Bank of Scotland Intelligent Finance Covered Bonds at 'AAA'; Outlook Stable
July 9, 2014 / 4:27 PM / 3 years ago

Fitch Affirms Bank of Scotland Intelligent Finance Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 09 (Fitch) Fitch Ratings has affirmed Bank of Scotland Plc's (BoS, A/Negative/F1) Intelligent Finance GBP5.7bn equivalent covered bonds at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The covered bonds' rating is based on BoS's Long-term Issuer Default Rating (IDR) of 'A', an unchanged D-Cap of 8 (minimal discontinuity) and the asset percentage (AP) that Fitch takes into account in its analysis. The 'AAA' breakeven AP for the programme remains unchanged at 86.7%, based on a 'AA+' rating on a PD basis and a one-notch recovery uplift for the covered bonds in a 'AAA' scenario. The expected loss on the assets stands at 17.1% in a 'AAA' scenario and represents the main driver of the breakeven AP for the programme. The cover pool assets comprise offset mortgage loans originated by Intelligent Finance. The 'AAA' loss calculated for the pool is relatively high compared to peers, due to the large proportion of high LTV loans and the conservative assumptions that address some missing loan and borrower characteristics data. Fitch classifies the programme as dormant as there has been no issuance for more than two years. Therefore, the agency only gives credit to the level of AP publicly committed to by the issuer, which is 86.7%. The D-Cap of 8 is driven by the minimal discontinuity assessment of the liquidity gap and systemic risk component. This is due to the pass-through feature of the bonds and the three-month interest reserve in place for the bonds. Fitch believes that none of the components compromise the overall minimal discontinuity assessment for the programme. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) BoS's IDR is downgraded by six notches to 'BB'; or (ii) the D-Cap is no longer minimal discontinuity and is classified as 2 (high risk) or worse; or (iii) the AP that Fitch takes into account in its analysis increases above Fitch's 'AAA' breakeven AP of 86.7%. Since the covered bond rating can sustain a one-notch downgrade of BoS's IDR to its Viability Rating of 'a-', the Outlook is Stable despite the Negative Outlook on BoS's IDR. The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the portfolio and Fitch's analysis will be available in a credit update report, which will shortly be available at www.fitchratings.com. Contact: Primary Analyst Iva Detelinova Analyst +44 20 3530 1663 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Kate Lin Director +44 20 3530 1706 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 March 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 14 May 2014, , 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 14 May 2014, 'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' dated 4 February 2014, 'EMEA Residential Mortgage Loss Criteria', dated 28 May 2014, 'Criteria Addendum United Kingdom', dated 30 May 2014 are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here EMEA Residential Mortgage Loss Criteria here Criteria Addendum: UK - Residential Mortgage Loss and Cash Flow Assumptions here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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